Investment Style in a Turbulent Decade

Abstract

Is the categorisation of investment funds useful in extremely volatile market conditions? Which method of style analysis, if any, dominates in terms of consistency, accuracy and robustness? We analyse the turbulent period 2000-2010 using Returns-Based (RBS), Characteristics-Based (CBS) and a new combined BFI-CBS method. All three perform well in terms of explaining out-of-sample cross sectional returns of a large sample of diversified US equity funds. The combined methodology performs best 2000-2005 but the CBS method performs best in the second period, (including 2007-2008 financial crisis). We attribute this to the timeliness of a portfolio snapshot relative to time-series analysis in a period of extreme economic and market turbulence